INDIAN STEEL INDUSTRY

Transcription

1 PUBLIC ENTERPRISES, GOVERNMENT POLICY AND IMPACT ON COMPETITION INDIAN STEEL INDUSTRY Final Report Prepared for the Competition Commission of India January 2009 Indicus Analytics New Delhi

2 Team Members Laveesh Bhandari Payal Malik A.S. Firoz Ramrao Mundhe Monica Jaitly Advisors Maj. General Bhupendra Yadav Dr. Ashok Desai i

3 Contents 1. Introduction Steel Industry in India: Overview, Performance and Structure... 3 Background... 3 Steel production processes... 4 Steel Producers... 5 Types of steel... 5 Production... 6 Consumption... 7 Trade... 7 Performance of the Indian Steel Industry... 7 Production... 7 Imports... 8 Exports... 9 Financials Institutional Design Policy regime for the Steel sector in India Role of Government Analysis of Competition in the Steel Industry Flat Products Semi-finished Products Market Market Sharing Government Interventions Import Policy Induced Distortions in the Competition in the Market Control Over Natural Resources and Captive Mines Structure of the Iron Ore Market Export Tax Competition issues in the Context of Investment and Growth Concluding Note Economies and Favoritism Conclusions Appendix I Tables - Steel Statistics Appendix - II Figures Appendix III International Trade in Iron Ore Global Experiences: Competition Issues Appendix IV History BIBLIOGRAPHY ii

4 Acronyms BR BIS BOF CAGR CAGR CR DEPB DRI EAF ESSAR GP/GC HBI HHI HRC IF IISI INSDAG IPT ISA ISPAT JPC JSPL JSWL JVSL M&A MBF NMDC NSP OC OHF OMC OMDC POSCO R&D RINL SAIL SDF SME SSICs TMBP TISCO TSL: TUFS Bars and Rods Bureau of Indian Standards Basic Oxygen Furnace Compound Annual Growth Rate Compound Annual Growth Rate Cold Rolled Duty Entitlement Passbook Scheme Directly Reduced Iron Electric Arch Furnace Essar Steel Ltd Galvanized Sheets Hot Briquetted Iron Herfindahl-Hirschman Index Hot Rolled Coils Induction Furnace International Iron & Steel Institute Institute for Steel Development and Growth Inter Plant Transfer Indian Steel Alliance Ispat Industries Ltd Joint Plant Committee Jindal Power and Steel Ltd. JSW Steel Ltd Jindal Vijaynagar Steel Ltd. Mergers and Acquisitions Mini Blast Furnace National Mineral development Corporation National Steel Policy Own Consumption Open Hearth Furnace Orissa Mining Corporation Orissa Mineral Development Corporation Pohang Steel Corporation Research and Development Rastriya Ispat Nigam Ltd Steel Authority of India Steel Development Fund Small and Medium Enterprises State Small Industries Corporations Tin Mill Black Plate Tata Iron and Steel Co. Tata Steel Ltd Technology Up-gradation Fund Scheme iii

5 1. Introduction India s economic growth is contingent upon the growth of the Indian steel industry. Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly used in engineering industries such as power generation, petrochemicals and fertilisers. India occupies a central position on the global steel map, with the establishment of new state-of-the-art steel mills, acquisition of global scale capacities by players, continuous modernisation and upgradation of older plants, improving energy efficiency and backward integration into global raw material sources. Steel production in India has increased by a compounded annual growth rate (CAGR) of 8 percent over the period to Going forward, growth in India is projected to be higher than the world average, as the per capita consumption of steel in India, at around 46 kg, is well below the world average (150 kg) and that of developed countries (400 kg). Indian demand is projected to rise to 200 million tonnes by Given the strong demand scenario, most global steel players are into a massive capacity expansion mode, either through brownfield or greenfield route. By 2012, the steel production capacity in India is expected to touch 124 million tonnes and 275 million tonnes by While greenfield projects are slated to add 28.7 million tonnes, brownfield expansions are estimated to add 40.5 million tonnes to the existing capacity of 55 million tonnes. Steel is manufactured as a globally tradable product with no major trade barriers across national boundaries to be seen currently. There is also no inherent resource related constraints which may significantly affect production of the same or its capacity creation to respond to demand increases in the global market. Even the government policy restrictions have been negligible worldwide and even if there are any the same to respond to specific conditions in the market and have always been temporary. Therefore, the industry in general and at a global level is unlikely to throw up substantive competition issues in any national policy framework. Further, there are no natural monopoly characteristics in steel. Therefore, one may not expect complex competition issues as those witnessed in industries like telecom, electricity, natural gas, oil, etc. This, however, does not mean that there is no relevant or serious competition issue in the steel industry. The growing consolidation in the steel industry worldwide through mergers and acquisitions has already thrown up several significant concerns. The fact that internationally steel has always been an oligopolistic industry, sometimes has raised concerns about the anticompetitive behavious of large firms that dominate this industry. On the other hand the set of large firms that characterize the industry has been changing over time. Trade and other government policies have significant bearing on competition issues. Matters of subsidies, non-tariff barriers to trade, discriminatory customs duty (on exports and imports) etc. may bring in significant distortions in the domestic market and in the process alter the competitive positioning of individual players in the market. The specific role of the state in creating market distortion and thereby the competitive conditions in the market is a well-known issue in this country. This report proceeds as follows. Section 2 of the report provides a brief over view of the performance and structure of the Indian steel industry by analysing published secondary time series data on certain key indicators. Market structure is analyzed using indicators such as number of players and their respective shares in total production, share of public and private players in the total production/sales, production capacity of major players, etc. Given the heterogeneous nature of the product this analysis is done for the various segments of steel that constitute the relevant market. This analysis is a precursor in identifying segments where competition may be an issue of concern to allow for a pointed analysis. Section 3 of the report documents policy and institutional structure governing the steel industry in India and the role played by the Government in the development of this industry. Section 4 of the report examines issues of competition of steel industry in India, by identifying the structurally inherent and the market determined positions of various steel firms specifically to see their market power, vis-à-vis both their final consumers as also those within the steel industry. The issues emerging out of the size and market shares, specifically taking into consideration the investment aspects are also discussed in this section. The other issue of significant importance in the context of competition is the command over natural resources that a few players possess and 1

6 that enable a significant cost advantage over the rest in the market. These are the result of government policies of the past, to support growth of a particular industry. These preferential policies and their impact on competition are also analysed in this section. Section 5 concludes with a discussion on state of the competition in the Indian steel sector pointing to a few key recommendations for the Competition Commission of India. Appendix I, II, III and IV provide data on the sector, and briefly discuss international conditions, and provide an historical overview. This study finds little evidence of any cartelization or joint pricing behaviour on the part of the incumbents. It finds that government intervention, and slow responsiveness to changing conditions has contributed to shortages in the past, which in turn leads to action by the incumbents that look like, but is not, anti-competitive behaviour. Unequal access to raw material, as well as export/import curbs, are the key issues affecting the creation of a level playing field. It is the last two as well as ready availability of information on costs and prices across the value chain that could warrant some action by the regulator. 2

7 2. Steel Industry in India: Overview, Performance and Structure Background The establishment of Tata Iron and Steel Company (TISCO) in 1907 was the starting point of modern Indian steel industry. Afterwards a few more steel companies were established namely Mysore Iron and Steel Company, (later renamed Vivesvaraya Iron & Steel Ltd) in 1923; Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron & Steel Ltd) in 1923; and Steel Corporation of Bengal (later renamed Martin Burn Ltd and Indian Iron and Steel Co) in All these companies were in the private sector. Key Events 1907*: Tata Iron and Steel Company set up. 1913: Production of steel begins in India. 1918: The Indian Iron & Steel Co. set up by Burn & Co. to compete with Tata Iron and Steel Co. 1923*: Mysore Iron and Steel Company set up 1939*: Steel Corporation of Bengal set up 1948: A new Industrial Policy Statement states that new ventures in the iron and steel industry are to be undertaken only by the central government. 1954: Hindustan Steel is created to oversee the Rourkela plant. 1959: Hindustan Steel is responsible for two more plants in Bhilai and Durgapur. 1964: Bokaro Steel Ltd. is created. 1973: The Steel Authority of India Ltd. (SAIL) is created as a holding company to oversee most of India's iron and steel production. 1989: SAIL acquired Vivesvata Iron and Steel Ltd. 1993: India sets plans in motion to partially privatize SAIL. Source: * Governmen of India, Joint Plant Committee Report 2007, rest of the dates from: At the time of independence, India had a small Iron and Steel industry with production of about a million tonnes (mt). In due course, the government was mainly focusing on developing basic steel industry, where crude steel constituted a major part of the total steel production. Many public sector units were established and thus public sector had a dominant share in the steel production till early 1990s. Mostly private players were in downstream production, which was mainly producing finished steel using crude steel products. Capacity ceiling measures were introduced. Basically, the steel industry was developing under a controlled regime, which established more public sector steel companies in various segments. Till early 1990s, when economic liberalization reforms were introduced, the steel industry continued to be under controlled regime, which largely constituted regulations such as large plant capacities were reserved only for public sector under capacity control measures; price regulation; for additional capacity creation producers had to take license from the government; foreign investment was restricted; and there were restrictions on imports as well as exports. Undoubtedly there has been significant government bias towards public sector undertakings. But not all government action has been beneficial for the public sector companies. Freight equalization policies of the past were one example. The current governmental moral-suasion to limit steel price increases is another. However, after liberalization when a large number of controls were abolished, some immediately and others gradually the steel industry has been experiencing new era of development. Major developments that occurred at the time of liberalization and thenceforth 2 were: 1. Large plant capacities that were reserved for public sector were removed; 2. Export restrictions were eliminated; 1 Government of India, Joint Plant Committee Report Government of India, Ministry of steel, Annul Report

8 3. Import tariffs were reduced from 100 percent to 5 percent; 4. Decontrol of domestic steel prices; 5. Foreign investment was encouraged, and the steel industry was part of the high priority industries for foreign investments and implying automatic approval for foreign equity participation up to 100 percent; and 6. System of freight ceiling was introduced in place of freight equalization scheme. As a result, the domestic steel industry has since then, become market oriented and integrated with the global steel industry. This has helped private players to expand their operations and bring in new cost effective technologies to improve competitiveness not only in the domestic but also in the global market. Private sector contribution in the total output has since been increasing in India. Development of private sector has caused high growth in all aspects of steel industry that is capacity, production, export and imports. During the last decade more than 12 mt of capacity has been added in the steel industry, this is mostly in the private sector. Recently, the steel industry is receiving significant foreign investments such as POSCO South Korean steel producer and Arcelor-Mittal Group UK/Europe based steel producer announcing plans for establishing about 12 mt production units each in India. The Indian steel industry, with a production of about 1 mt at the time of independence, has come long way to reach the production of about 57 mt in Moreover, the steel industry is showing promising future growth as major players in the industry have announced their plans for significant investments in expanding their capacities. Impressive development of the steel industry with active participation of private sector and integration of India steel industry with the global steel industry has also induced the government to come up with a National Steel Policy in The National Steel Policy 2005 was drafted with the aim of establishing roadmap and framework for the development of the steel industry. The policy envisages steel production to reach at 110 mt by with annual growth rate of 7.3 percent. As later sections will show these expectations are not excessively high. With increasing need for large investments in the industry private sector s role would be crucial in the development of the steel industry. The future, it appears, will continue to be dominated by a few large players and the industry will remain oligopolistic as it is internationally. Moreover, as shown in Appendix I share of fixed cost to total cost for selective steel producers in India is very high making it prone to increasing returns to scale and the consequent market structure (See Table A1.8). TISCO, public sector entities, POSCO, Jindals, Essar, and Arcelor-Mittal will be among the major players accounting for the bulk of the 100 plus million tons of production in the future. There is a key factor behind the predominance of large units and oligopolistic industry structure. And that is the production process. The following section discusses the process and underlying technology. Steel production processes Blast furnace/basic oxygen furnace (BF/BOF): BF basically converts iron ore into liquid form of iron. Iron produced by BF contains high amount of carbon and other impurities, this iron is called pig iron. Pig iron due to its high carbon content has limited end use application such as covers of manholes. To make steel products out of pig iron it is further processed into BOF where its carbon content and other impurities are burnt or removed through slag separation. Main inputs to BF are iron ore and coal/coke. BOF is also called oxygen furnace because oxygen is the only fuel used in the process. Generally, integrated milling use BF/BOF routes to produce finished steel. Producers that use this technology include SAIL, RINL, TSL and JSWL. Electric Arc Furnace (EAF): Basic purpose of the EAF is remelting sponge iron, melting scrap, its main inputs, to produce finished steel. It uses electricity as much as kwh/ton. ISPAT, ESSAR, and the Jindal group are examples of producers, which use this technology. COREX or Cipcor Process: COREX is an advance process of making steel. Though few use this process, it is possible to use non-coking coal directly in smelting work and it also makes it possible to use lump ore and pellets as inputs. These two advantages allow steel producers to eliminated coking plants and sinter plants. Purpose of coking plant is to convert non-coking coal into more efficient fuel and purpose of sinter plant is purify lump ore or pellets for further 4

9 processing. Basic inputs to COREX are iron-ore and coal. Jindal Iron & Steel Company (JISCO) uses COREX technology to produce finished steel. Induction Arc Furnace (IAF): is one of the most advance processes of making steel. Like EAF it uses electricity as its main fuel. IAF is most environment friendly and efficient way of producing steel. However, its lack of refining capacity requires clean products as its inputs. Large numbers of small steel companies use this technology. The high weight of the product significantly pushes up transport and movement costs. Therefore large integrated plants are the norm for cost efficient production. For specialized steel and alloys efficient production by smaller plants is possible. Steel Producers Broadly there are two types of producers in India viz. integrated producers and secondary producers. Integrated steel producers have traditionally integrated steel units have captive plants for iron ore and coke, which are main inputs to these units. Currently there are three main integrated producers of steel namely Steel Authority of India Limited (SAIL), Tata Iron and Steel Co Ltd (TISCO) and Rashtriya Ispat Nigam Ltd (RINL). SAIL dominates amongst the three owing to its large steel production capacity plant size. Secondary producers use steel scrap or sponge iron/direct reduced iron (DRI) or hot briquetted iron (HBI). It comprises mainly of Electric Arc Furnace (EAF) and Induction Furnace (IF) units, apart from other manufacturing units like the independent hot and cold rolling units, rerolling units, galvanizing and tin plating units, sponge iron producers, pig iron producers, etc. Secondary producers include Essar Steel Ltd., Ispat Industries Ltd., and JSW Steel Ltd. There are 120 sponge iron producers; 650 mini blast furnaces, electric arc furnaces, induction furnaces and energy optimizing furnaces; and 1,200 re-rollers in India. 3 The integrated producers constitute most of the mild steel production in India. Their main products include flat steel products such as Hot Rolled, Cold Rolled and Galvanised steel. They also produce long and special steel in small quantities. On the other, secondary producers largely produce long steel products. Re-rollers are the units that come under secondary producers category, and produce small quantity of steel like long and flat products. These units either procure their inputs from the market or through their backward integrated plants. They use sponge iron, pig iron or combination to produce finished steel or ingots. 4 Types of steel 5 Steel is an iron based mixture containing two or more metallic and/or non metallic elements usually dissolving into each other when molten. Since it is an iron based alloy as per its end use requirements other than iron it may contain one or more other elements such as carbon, manganese, silicon, nickel, lead, copper, chromium, etc. For example, stainless steel (a type of steel) mainly contains chromium that is normally more than 10.5 percent with/without nickel or other alloying elements. Steel is produced using Steel Melting Shop that includes converter, open hearth furnace, electric arc furnace and electric induction furnace. There are broadly two types of steel according to its composition: alloy steel and non-alloy steel. Alloying steel is produced using alloying elements like manganese, silicon, nickel, chromium, etc. Non-alloy steel has no alloying component in it except that are normally present such as carbon. Non-alloy steel is mainly of three types viz. mild steel (contains upto 0.3% carbon), medium steel (contains between % carbon) and high steel (contains more than 0.6% carbon). All types of steel other than mild steel are called special steel. It is mainly because a special care is taken in order to maintain particular level of chemical composition in such steel. This process gives different properties to the steel according to its composition. In India, non-alloying steel constitutes about 95 percent of total finished steel production, and mild steel has large share in it. 3 Government of India, Ministry of Steel, National Steel Policy, Information, related to definition and categories of steel, used in this part of the section is based on the Glossary of Terms/ Definitions commonly used in Iron & Steel Industry by Ministry of Steel, Government of India. For more information visit: 5

10 According to shape/size/form steel is categorized into different types such as liquid steel, ingots, semis (semi-finished steel) and finished steel. Liquid steel is a first product that comes out from Steel Melting Shop. Liquid steel further goes into ingots, and then ingots advance to semis. Semis are called semi-finished steel products because they are further subject to forging/rolling in order to produce finish steel products such as flat steel products and long steel products. Crude steel generally includes ingots and semis. According to end use, steel is categorized into structural steels, construction steel, deep drawing Steel, forging quality, rail steel, etc. The following chart depicts various types of steel products according to different categories. Chart 2.1: Categories/types of steel products Steel Form/size/ shape Composition End use Liquid steel Alloy steel Non-alloy steel Structural steel Crude steel Stainless steel Low carbon or Mild steel Construction steel Ingots Siliconelectrical steel Medium carbon steel Deep drawing steel Semis High speed steel High carbon steel Rail steel Finished steel Foreign quality steel Flat products Non-flat Products Production During the last five years finished steel production (alloy and non-alloy) grew at the rate of 8 percent (CAGR) to reach at mt in from mt in (Table 2.2). In , the secondary producers alone contributed about 76 percent and the rest came from the main producers. After liberalization, on the account of active participation of private sector in the steel industry, public sector share in the total production started dwindling. In , share of public sector in the finished steel production (alloy & non-alloy) was 28 percent, which was reduced to 23 percent in According to estimates of Ministry of Steel 6, Government of India production capacity of the steel industry will be 124 mt at the end of the year It is mainly attributed to positive trends in the consumption. Main producers such as TISCO, SAIL and JSW are aggressively investing in expanding their plant capacities. TISCO has an installed production capacity of 7.5 to 8 mt with another 2.4 mt would be added by The TISCO is the front runner with an expansion plan of about 30 mtpa by JSW and SAIL have expansion plans of about 27 mtpa and 24 mtpa, respectively. 6 Government of India, Ministry of Steel, Annual Report

11 Consumption During last five years ( to ) the steel consumption has grown by about 11 percent, which was higher than the estimation of National Steel Policy Especially in last two years ( and ) consumption growth has been quite impressive, percent and percent, respectively. The consumption has reached its ever highest level of mt in (see figure 2.2). Some estimations state that this upturn trend in consumption will continue in the future mainly owing to healthy economic growth and promising demand from growth driving sectors such as infrastructure, construction, housing, consumer durables, etc. India s per capita consumption of steel stood at 46 kg, whereas world average is 150 kg. Average for developed world is 450 kg. Thus, it is clear that there is much scope for the growth of consumption in India. Major sectors which contributed to steel consumption in are depicted in the figure below (Figure 2.3). Infrastructure and manufacturing sectors together contributed almost 50 percent of total demand for the steel in Trade In last five years ( to ) imports are growing at much faster rate than exports. As a result net trade in steel is getting narrower (see Table 2.1). While imports have grown by CAGR of percent, exports have grown just by a CAGR of 2.16 percent in last five years. Overall net trade in steel has managed to be in surplus till Performance of the Indian Steel Industry Data from a range of sources including Joint Plant Committee, Prowess Database, as well as international trade data, all reveal that there is no single entity that dominates either the sector as a whole, or any of the major product segments. Tables are provided at the end of this chapter. But the key point is that this is not a monopoly, either in its aggregate form, or in any of its components. Later chapters will discuss whether there is any evidence of anti-competitive behavior by the incumbents. In segment after segment, the pattern is very clear; the more aggressive growth oriented firms have been capturing greater market shares. In some cases, they may be relatively smaller secondary producers, and in others the larger one. There is no evidence, of expansion of output or profitability, that anti-competitive behaviour of any of these firms, should have resulted in. Production As mentioned above, growth of the Indian steel industry has been quite rapid; production growth CAGR was about 8 percent (see Table 2.2), very much in line with economic growth during and The private sector constituted 77 percent of the total production in , and its share has been rising for the past few years. While SAIL is a major public sector undertaking, it is also the largest producer of steel in the country accounted for 17 percent of the total production in , followed by TSL and RINL with shares 8 percent and 5 percent, respectively. At-least where market sizes are concerned, whether individually or as a group, the public sector is no longer at the commanding heights of the steel sector. But a better understanding is received when we look at the segment-wise break-up in later sections. In non-alloy steel constituted 95.6 percent of total finished steel production and rest was alloy steel. Out of total non-alloy production non-flat products were percent, and in the rest percent were flat products and 2.39 percent were pipes (large dia). Of total finished (non-alloy) productions of bars & rods (non-flat product) and hot rolling coils/skelp/strips (flat product) were percent and percent, respectively. Together these two major products constituted for percent of total finished (non-alloy) steel production in This trend has been more or less constant for last five years (see Table 2.3). The top six segments: Bars & rods, structurals, HR coild/strips/skelps, cold rolling coils/strips, plates and GC/GP sheets, contributed about percent of total finished steel (non-alloy) production in About 70 percent of bars and rods production came from secondary producers in , which was increased to 72.3 percent in For HR coils/sheets/strips/skelps the figure was 55 7

12 percent. Secondary producers comprising ESSAR, JSWL, ISPAT and other small secondary producers have experienced rise in their shares in total production of HR coils/sheets/strips/skelps. Bars and Rods (BR) BR is a major part of the total steel production (non-alloy) in the country. The segment recorded a growth rate of about 6.3 percent the highest in last five years prior to (later data are no yet available). Since the BR segment constitutes 76 percent of total non-flat steel production, it was a major contributor to the growth rate of non-flat steel production overall. The main producers accounted for 30 percent and 27 percent of total BR production in and , respectively. The public sector RINL has a large share (17%) among main producers in the production of BR. However, RINL s share has recorded 2 percent decrease in last two years. Secondary producers have seen increase in their share in total BR production from 70 percent in to 73 percent in Structurals The two public sector undertakings, SAIL and RINL, are the major producers of structurals. Both the companies constituted 36 percent of total production of structurals in the country. However, the shares of SAIL and RINL have been declining quite rapidly. In combined share of SAIL and RINL stood at 23 percent, which was 36 percent in As the accompanying tables later show, the share of SAIL has declined more than RINL. However the share of secondary producers in total structurals has been rising from 64 to 77 percent between and This does not indicate any great advantages that these players might have, but merely that the public sector entities have not been investing as much. Hot Rolling coils/plates/sheets SAIL is the single largest producer of HR coils/plates/sheets, followed by TSL and JSWL with the shares of 36 percent, 22 percent and 10 percent in However, in , shares of SAIL and TSL declined to 31 percent and 19 percent. And shares of other major producers: ESSAR, ISPAT and JSWL increased. CR coils/sheets CR coils/sheets experienced CAGR of 5.13 percent between and CR coils/sheets constitute 9-10 percent of total finished steel (non-alloy) production. There are two main producers namely TSL and SAIL of CR coils/sheets. These two producers accounted for 52 percent of total production of CR coils/sheets in Market of CR coils/sheets is oligopolistic in nature as top four producers were responsible for 85 percent of total production of CR coils/sheets in GP/GC sheets GP/GC sheets segment has share of 8-9 percent in total finished steel (non-alloy) production. For last two years ( and ), the top six producers accounted for almost 49 percent of total GP/GC sheets production. Share of the secondary producers, which include ESSAR, JSWL, ISPAT and other secondary producers has been increasing. As in their contribution to total production of GP/GC sheets was 76 percent, which reached to 82 percent in On the other side, main producers (TSL and SAIL) share in the production of GP/GC sheets has declined from 24 percent in to 19 percent in Plates Plates constitute 6-7 percent of total finished steel (non-alloy) production. SAIL dominates the market for plates as it accounted for 71 percent of total plates production in Even though SAIL s share in total plates production has declined from 86 percent in to 71 percent in , it still dominates the market for plates. Combine share of just two companies SAIL and ESSAR was responsible for 90 percent of total plates production in India in Imports Top six steel products were responsible for 73 percent of total imports of steel in India in Main contributors were HR coils/skelps/strips/sheets, Plates and CR coils/sheets, which together constituted 56 percent of total imports in , which increased to 62 percent in Particularly in the last two years ( and ) imports of BR and structurals have 8

13 declined. Flat products such as plates, CR coils/sheets and GP/GC sheets have seen positive growth from to Imports of HR coils/skelps/strips/sheets, a single largest import item, have observed marginal decline in In general India is becoming net importer and expected to be so in Imports grew at a CAGR of about 24 percent in last five years. This is mainly due to increase in domestic demand for specific quality/size/grade of steel. Moreover, price considerations for specific quality/size/grade of products have pushed imports upwards 8. Imports as percentage of total consumption have grown in last five years. India imported 5.42 percent of its total steel consumption in , which rose to in Exports GP/GC sheets constituted a single largest product in total exports of steel. Share of GP/GC sheets were 30 percent in total steel export in , which dipped by 5 percent in the following year. However, it recovered to reach at 37 percent in Although exports of three major segments: GP/GC sheets, HR coil/strips/skelps/sheets and CR sheets/coils have declined in the last three, these segments still formed 70 percent of total exports of steel in Overall moderate growth of exports during the last five years has been mainly due to the need to meet the growing domestic demand and to some extent appreciating rupee was also responsible for the slow growth in exports 9. During the last five years share of exports in total finished steel (alloy & non-alloy) production has declined. As can be observed from table 2.14, India exported percent of total production in , which reduced to percent in Financials The year was a good year for Indian steel industry as it registered positive growth as a whole. During January-March 2007 PTA for the sector as a whole was Rs crores a growth of 14 percent over previous quarter 10. Tables 2.14 and 2.15 show profitability of the major incumbents. PAT as a share of Capital Employed varies greatly, as for the big players like SAIL, TSL and JSW Steel it is around 16 percent, 15 percent and 14 percent respectively. For other secondary main producers such as Essar Steel Ltd and Ispat Industries Ltd the figures were 4.84 percent and percent. Even if we see figures on Return on Capital Employed (ROCE), the picture remains same as Essar Steel and Ispat Industries have performed badly compared to other three big steel producers (Table 2.15). The later sections of this report will show that the government preferences towards big steel players especially in the context of iron ore captive mining have put smaller players at disadvantageous state in the market. Big players, with full or partial captive facilities, do enjoy low cost of production and secure supply of raw material. Nevertheless, inherent nature of the steel industry, which requires huge initial investments to create production base and expand the capacities, is also responsible for the oligopolistic nature of the industry. 7 Joint Plant Committee, performance review: iron & steel Ibid 9 Ibid 10 Ibid 9

14 Tables and Figures Figure 2.1: Share of main and secondary producers in total finished steel production (alloy and non-alloy) Main Producers Secondary Producers * Source: *Figures for April-December Figure 2.2: Finished steel production (alloy & non-alloy) in million tonnes Consumption Source: Government of India, Ministry of Steel, Annual Report Figure 2.3: Major consumer of steel in (in %) Source: CARE Steel Industry Report Table 2.1: India s Trade in finished Steel (alloy & non alloy) 10

15 in million tonnes Year Import Export Net Source: Joint Plat committee, Annual Report Table 2.2: Producer-wise production of finished steel (alloy & non-alloy) for sale (in 000 tonnes) Producers/Year Public Sector SAIL 8312 (21) 8792 (20) 9153 (20) 9283 (18) 9806 (17) RINL 2652 (7) 2834 (7) 2904 (6) 2980 (6) 3042 (5) Other PSUs 193 (0) 222 (1) 262 (1) 329 (1) 343 (1) A. Total Pub (28) (27) (26) (25) (23) Private Sector TSL 3377 (9) 3535 (8) 3505 (7) 3821 (7) 4423 (8) Majors 4917 (13) 5832 (13) 6786 (14) 9534 (19) (20) Other secondary producers (50) (51) (52) (49) (49) B. Total Pvt (72) (73) (74) (75) (77) Grand Total (A+B) (100) (100) (100) (100) (100) Source: Joint Plant Committee; Figures in parenthesis indicate percentage of total; Production figures include interplant transfers and own consumption. Table 2.3: Segment-wise production of finished steel (non-alloy) (in 000 tonnes) Segment 200( Bars & Rods (39) (37) (38) (37) (37) HR Coils/Skelp/Strips 8385 (24) 8757 (23) 9215 (23) 9515 (21) (22) Structurals/Spl.Sec (8) 3944 (10) 4008 (10) 4484 (10) 4884 (10) CR Coils/Sheets/Strips 3366 (10) 3557 (9) 3485 (9) 3989 (9) 4322 (9) GP/GC Sheets 2790 (8) 3130 (8) 3672 (9) 3782 (9) 4391 (9) Plates 1832 (5) 2182 (6) 2575 (6) 2974 (7) 3342 (7) Others 2204 (6) 2658 (7) 2428 (6) 3010 (7) 3265 (7) Total (100) Figures in parenthesis indicate percentage of the total. Source: Joint Plant Committee (100) (100) (100) (100) Table 2.4: Producer-wise production of steel (non-alloy) Bars & Rods (in 000 tonnes) Year TSL SAIL RINL Other secondary producers Total (5) (8) (17) 9732 (70) (100) (5) (8) (17) (70) (100) (5) (8) (17) (71) (100) (5) (7) (16) (72) (100) (7) (6) (15) (73) (100) Source: Joint Plant Committee; and Steel Scenario Yearbook 2007, Spark Steel & Economy Research Centre (p) Ltd.; Figures in parenthesis indicate percentage of total. 11

16 Table 2.5: Producer-wise production of steel Structurals (non-alloy) (in 000 tonnes) Year SAIL RINL Others secondary producers Total (26) 299 (10) (64) 2983 (100) (19) (11) (70) 3944 (100) (19) (7) (74) 4008 (100) (18) (7) (76) 4484 (100) (17) (6) (77) 4884 (100) Source: Joint Plant Committee; and Steel Scenario Yearbook 2007, Spark Steel & Economy Research Centre (p) Ltd. Figures in parenthesis indicate percentage of total. Table 2.6: Producer-wise production of HR coils/sheets/plates (in 000 tonnes) Producers/Year SAIL 4648 (36) (31) TSL 2846 (22) 3030 (19) JSW steel Ltd (10) 2148 (14) ESSAR 1700 (13) 2580 (16) ISPAT 1500 (12) 2143 (14) Other Secondary 985 (8) 1052 (7) Total 12979(100) (100) Source: Estimated from Joint Plant Committee and specific company information. Figures in parenthesis indicate percentage of total. Table 2.7: Producer-wise production of steel CR coils/sheets (in 000 tonnes) Others Year TSL SAIL ESSAR JSWL ISPAT secondary Total producers (25) (27) (48) (23) (26) (50) (26) (26) (10) (37) (25) (23) 298 (7) 269 (7) 844 (21) (17) (23) (22) 859 (20) 295 (7) 846 (20) (9) 4322 Source: Joint Plant Committee; and Steel Scenario Yearbook 2007, Spark Steel & Economy Research Centre (p) Ltd.; Figures in parenthesis indicate percentage of total. Table 2.8: Producer-wise production of steel GP/GC sheets (in 000 tonnes) Year TSL SAIL ESSAR JSWL ISPAT Others secondary producers Total (13) (11) NA NA NA (76) 2790 (100) (14) (11) NA NA NA (75) 3130 (100) (14) (8) (10) (68) 3672 (100) (13) (8) 191 (5) 232 (6) 782 (21) (47) 3782 (100) (12) (7) 339 (8) 301 (7) 742 (17) (50) 4391 (100) Source: Joint Plant Committee; and Steel Scenario Yearbook 2007, Spark Steel & Economy Research Centre (p) Ltd.; Figures in parenthesis indicate percentage of total. 12

17 Table 2.9: Producer-wise production of steel Plates (in 000 tonnes) Others secondary Year TSL SAIL ESSAR JSWL ISPAT producers Total (3) (86) NA NA NA (11) 1832 (100) (4) (84) NA NA NA (11) 2182 (100) (3) (84) 253 (10) (3) 2575 (100) (3) (75) 523 (18) 0 86 (3) 44.5 (1) 2974 (100) (2) (71) 638 (19) (5) 71.8 (2) 3342 (100) Source: Joint Plant Committee; and Steel Scenario Yearbook 2007, Spark Steel & Economy Research Centre (p) Ltd. Table 2.10: Segment-wise imports of steel (alloy & non-alloy) in India (in 000 tonnes) Segment/ Year Bars and Rods 103.1(6) (6) 71 (4) (5) 375 (8) (5) Structurals 46.8 (3) 17.4 (1) 66.4 (3) 99.1 (2) 86.2 (2) Plates (21) (23) (16) (16) (21) HR Coils/Skelps /Strips/sheets (20) (23) (33) (33) (30) CR Coil/Sheets (17) (13) (11) (10) (11) GP/GC Sheets 91.9 (5) (6) (4) (3) (4) Others (28) (31) (29) 1339 (28) (27) Grand Total (100) (100) (100) (100) (100) Source: Joint Plant Committee; Figures in parenthesis indicate percentage of total Table 2.11: Imports as a percentage of consumption of steel (alloy & non-alloy) (in %) Category Bars and Rods Structurals Plates HR Coils/Skelp/Strips/sheets CR Coil/Sheets/TMBP GP/GC Sheets Others Grand Total Table 2.12: Category-wise exports of steel (alloy & non-alloy) (in 000 tonnes) Category Bars & Rods (10) 499 (8) 162 (3) 387 (7) 329 (6) Structurals 34.7 (1) 64 (1) 70 (1) 89.4 (2) 75 (1) Plates (5) 355 (6) 158 (3) (3) (2) H R Sheets/Coils (26) 1522 (26) 1328 (27) (26) (27) C R Sheets/Coils (11) 770 (13) 620 (12) (9) (7) GP/GC Sheets 1610 (30) 1486 (25) 1843 (37) (36) (37) Others (17) 1195 (20) 785 (16) (17) (21) Grand total (100) 5891 (100) 4966 (100) (100) (100) Source: Joint Plant Committee; Figures in parenthesis indicate percentage of total 13

18 Table 2.13: Export as a percentage of total finished steel Production (alloy & non-alloy) Category Bars & Rods Structurals/Spl.Sec Plates H R Coils/Skelp/Strips/sheets C R Coils/Sheets/Strips GP/GC Sheets Others Total Production (Alloy & non-alloy) Table 2.14: Financial performance of major and other major producers I (Rs. Crore) Company Name Sales PAT* PAT/cap. Sales/cap. Capital Employed Employed employed (%) (%) Essar Steel Ltd Ispat Industries Ltd J S W Steel Ltd SAIL Tata Steel Ltd *Profit After Tax Table 2.15: Financial performance of major and other major producers II (Rs. Crore) Company Name Current liabilities & provisions Total Assets PBIT# ROCE* Essar Steel Ltd Ispat Industries Ltd J S W Steel Ltd SAIL Tata Steel Ltd *Return on Capital Employed; # Profit Before Interest & Tax. 14

19 3. Institutional Design Introduction Steel was under a fairly strict framework of regulation till 1992 and the erstwhile policy was to allocate scarce investment and infrastructure resources for optimum and planned development of the industry and to make available this scarce industrial intermediate to the users at a reasonable price. The basic purpose of the past policy was to manage a scarcity driven market towards an announced objective of establishing a fair and equitable distribution of this product and to keep it affordable as far as possible. The pre-reform steel market in India was controlled in all relevant areas. Competition was limited in this shortage-infested market that had no real role to play in the growth of the individual companies or their performance and the allocative efficiency of investible resources. The prices set by the government were more on political consideration and not strictly on the basis of costs of production or markets demand and supply balance. 11 In the absence of an elaborate and an efficient distribution mechanism, one can expect such a system of controlled prices to be favourable to the consumers. However, the trading intermediaries, with whatever role they were allowed to play, gobbled up the margin between the market and the administered prices, with little benefits left to the vast number of small consumers. This was natural given that supply was limited, and higher demand required an allocation mechanism between the many competing consumers. And the intermediaries used price as a means of allocation. In free market such price controls only lead to rents for those not facing the controls. In this particular case this would have only adversely affected the willingness of those facing the controls to invest in increasing production or improving technology. Following the reforms ushered in the nineties this regulatory regime was dismantled. The steel market and the industry currently are free from all regulations in trade, production and investment. Till some time ago, steel was included in the list of essential commodities. After it has been removed, the government s scope for direct policy backed intervention has reduced considerably. The chapter is organized as follows, Section I describes the policies governing the industry, section II discusses the role of Government and section 3 discusses the specific role of Government in promoting competition in the Industry. Policy regime for the Steel sector in India Under the new industrial policy, iron and steel has been made one of the high priority industries. Price and distribution controls have been removed as well as foreign direct investment up to 100% (under automatic route) has been permitted. The Trade Policy has also been liberalized and import and export of iron and steel is freely allowed with no quantitative restrictions on import of iron and steel items. Tariffs on various items of iron and steel have drastically come down since levels and the government is committed to bring them down to the international levels. With the abolishing of price regulation of iron and steel in 92, the steel prices are market determined. The Government announced the National Steel policy in The policy targets indigenous production of 110 million tonnes (mt) by from the level of 38 mt at a compounded annual growth of 7.3 percent per annum. Similarly targeted consumption is 90 mt by from the level of 36 mt, implying a CAGR of 6.90 percent. The policy devises a multi-pronged strategy to achieve these targets with following focus areas - removal of supply constraints especially availability of critical inputs like iron ore; improve cost competitiveness by expanding and strengthening the infrastructure in roads, railways, ports and 11 Although on paper, the steel prices were to be based on an elaborate model developed by the Bureau of Industrial Costs and Prices, in practice, the same was rarely followed. 15

20 power; increase exports; 12 meet the additional capital requirements by mobilizing financial resources; promote investments by removing procedural delays. In addition the policy also addresses challenges arising out of environmental concerns, human resource requirements, R&D, volatile steel prices and the secondary sector. The Eleventh plan working group for steel recommends the following for effective development of the steel industry: 1. Full utilization of the existing policy framework of Public-Private Partnerships (PPPs) in development of infrastructure like Railways. 2. Set up an R&D Mission in order to provide accelerated thrust on R&D and thereby improve the competitiveness of the industry. 3. Spread awareness about hedging mechanisms available in exchanges like MCX and NCDX and develop appropriate regulatory mechanism to avoid any manipulative practices. 4. Develop an appropriate Institutional Framework for collection of data and dissemination of Information. 5. Consider setting up of a multi-disciplinary organization along the lines of the International Iron & Steel Institute (IISI). 6. Proposal to have a dedicated plan fund of Rs. 25 crores for the 11th Five Year Plan in the Ministry of Steel towards grant for development of human resources for iron and steel and for ad campaigns for promotion of steel usage. 7. A Technology Up gradation Fund Scheme (TUFS) for the Small and Medium Enterprises (SME) sector in steel industry to upgrade the technological profile of the plants in the SME sector. Role of Government In the pre reform era, the ministry of steel played the role of key regulator and was involved in decision making related to pricing, allocation and distribution. With dismantling of the strict regulatory regime, the role of Government in all sectors has changed to that of a facilitator. So is true of the steel industry. In the post-de-regulation period, the role of the Ministry of Steel is now considered that of a facilitator. This is how the government itself sees its role. 13 The box below excerpts the annual report of the Ministry overseeing the steel sector. Given the oligopolistic features of the steel industry, the role of Government in promoting competitive forces in the industry is of some importance. Government intervention may be called for, especially to protect larger consumer interests. But whether it is done via policy or through some regulatory/judicial mechanism is the question of interest. However, the government continues to intervene in ad-hoc ways through its administrative ministry on and off. For instance government's diktat to the steel producers to hold prices down in the face of rising domestic and global demand for steel is a clear example of government's undue intrusion in the market. Excerpts from Annual Report , Ministry of Steel, Government of India. Role of the Ministry 1. Providing linkage for raw materials, rail movement clearance etc. for new plants and expansion of existing ones. 2. Facilitating movement of raw materials other than coal through finalization of wagon requirements and ensure an un-interrupted supply of raw materials to the producers. 3. Interaction with All India Financial Institutions to expedite clearance of projects. 4. Regular interactions with entrepreneurs proposing to set up new ventures, to review the progress of implementation and assess problems faced. 5. Identification of infrastructural and related facilities required by steel industry. 12 In the current economic climate, it is not clear why export should remain a policy objective. Given the expectation of 7% plus long term economic growth, such production increases would barely be adequate to meet domestic demand. 13 Annual report( ), Ministry of Steel 16